Is your company insolvent? The two tests and what changes when you know.

The cash-flow and balance-sheet tests for insolvency, the duties that switch on the day you know, and what wrongful trading means for you personally.

Directors Lifeline editorial teamLast reviewed 4 November 2026

Test one: cash flow

Can the company pay its debts as they fall due? Build a 13-week cash flow with real due dates: PAYE, VAT, rent, the Bounce Back Loan instalment, supplier invoices, wages, loan repayments, against the cash you have and the cash you are confident will arrive from invoices already raised. Not the pipeline. If the balance goes negative and stays there, the company is cash-flow insolvent. If you are only keeping it positive by not paying HMRC, you already knew.

Test two: balance sheet

Are liabilities, including contingent and prospective ones, greater than assets? Update the last balance sheet to today with honest values: stock at what it would fetch, debtors less the ones who will not pay, goodwill at nothing. Add the liabilities not yet on it: dilapidations, redundancy costs if you stop, the tax on the directors’ loan, guarantees you have given.

The third question

Failing a test does not by itself mean stop trading. The question the law asks next is whether there is a reasonable prospect of avoiding insolvent liquidation. A signed contract, confirmed investment or a written repayment agreement are reasonable prospects. A hope is not. If there is one, trade on, minimise creditors’ losses and minute every decision. If there is not, stop increasing the losses and take advice.

What switches on when you cross the line

The creditors come first. Shareholders’ interests, including yours, drop to the bottom.
Payments to favoured creditors in the previous six months (two years for connected parties) become reversible as preferences.
Assets sold or given away for less than they are worth become reversible as transactions at undervalue.
Your conduct goes on the record. A liquidator will report on it to the Insolvency Service.

What to do this week

Build the 13-week cash flow. It takes an afternoon.
Update the balance sheet with honest values and the missing liabilities.
Write a dated note of the result and your decision, and keep it with the company records.
If either test fails and there is no confirmed way out, speak to a licensed practitioner this week.

Nothing on this page is advice. We are an information service. When you want someone who can act, we introduce you to a licensed insolvency practitioner. The first conversation is free. The practitioner pays our referral fee; you pay nothing.

Questions directors ask

My accountant says the balance sheet is positive, so we are fine?

The balance-sheet test is one of two. If you cannot pay HMRC when it is due, the company is insolvent on the cash-flow test regardless.

Does insolvency mean I have to liquidate?

No. It means your duties have changed and you need to decide, with advice, whether the company can be rescued or should be closed. Deciding late is what costs you.

HMRC has always let us pay late. Is that a problem?

It describes a company that has been cash-flow insolvent for some time. HMRC's tolerance ends without warning, usually with a winding-up petition.

Guides on this

Speak to a licensed practitioner

Five questions. A licensed practitioner matched to your problem will call you, usually within a few hours during the working day. Your details go to that one practitioner and nobody else.